EDHEC-Risk Concept Industry Analysis Featured Analysis Latest EDHEC-Risk Surveys Research News Research Papers Books Features Interviews Indexes and Benchmarking EDHEC-Risk Efficient Equity Indices FTSE EDHEC-Risk ERAFP SRI Index Equity Index Research EDHEC-Risk Alternative Indexes Hedge Fund Index Research EDHEC-Risk IEIF Commercial Property Indices Amundi ETF "Core-Satellite and ETF Investment" Research Chair Style and Performance Analysis Hedge Fund Performance EuroPerformance/EDHEC-Risk Institute Style Ratings Performance Measurement for Traditional Investment Asset Allocation and Alternative Diversification Real Assets Newedge "Advanced Modelling for Alternative Investments" Research Chair CME Group "Exploring the Commodity Futures Risk Premium: Implications for Asset Allocation and Regulation" Strategic Research Project SGCIB "Structured Equity Investment Strategies for Long-Term Asian Investors" Strategic Research Project Asset Allocation and Derivative Instruments Structured Forms of Investment Strategies FBF "Structured Products and Derivatives" Research Chair Eurex "The Benefits of Volatility Derivatives in Equity Portfolio Management" Strategic Research Project ALM and Asset Management AXA Investment Managers "Regulation and Institutional Investment" Research Chair BNP Paribas Investment Partners "ALM and Institutional Investment Management" Research Chair Deutsche Bank "Asset-Liability Management Techniques for Sovereign Wealth Fund Management" Research Chair Ontario Teachers' Pension Plan "Advanced Investment Solutions for Liability Hedging for Inflation Risk" Research Chair Rothschild & Cie "The Case for Inflation-Linked Corporate Bonds: Issuers' and Investors' Perspectives" Research Chair Russell Investments "Solvency II Benchmarks" Research Chair La Française AM "Dynamic Allocation Models and New Forms of Target-Date Funds for Private and Institutional Clients" Research Chair Operational Risks and Performance Best Execution: MiFID and TCA Mitigating Hedge Funds Operational Risks CACEIS "Risk and Regulation in the European Fund Management Industry" Research Chair EDHEC-Risk Publications Reports, Studies, Surveys and Position Papers Academic Publications All EDHEC-Risk Publications Events Events organised by EDHEC-Risk Institute Alternative Investments Seminar, Singapore, 6-9 February, 2012 CFA Institute/EDHEC-Risk Institute Advances in Asset Allocation Seminar, San Francisco, 6-8 March, 2012 EDHEC-Risk Days Europe 2012, London, 27-29 March, 2012 Alternative Asset Allocation Seminar, New York, 11-13 April, 2012 Advances in Equity Portfolio Construction Seminar, London, 19-20 April, 2012 State-of-the-Art Commodities Investing Seminar, Singapore, 23-24 April, 2012 EDHEC-Risk Days Asia 2012, Singapore, 9-10 May, 2012 CFA Institute/EDHEC-Risk Institute Advances in Asset Allocation Seminar, New York, 12-14 June, 2012 Advanced Commodity Investment Seminar, London, 19-20 June, 2012 Events involving EDHEC-Risk Institute's participation EDHEC-Risk Institute Presentation Research Programmes Research Chairs and Strategic Research Projects Partnership International Advisory Board Team EDHEC-Risk News EDHEC-Risk Newsletter EDHEC-Risk Press Releases EDHEC-Risk in the Press Careers EDHEC Business School EDHEC-Risk Executive Education EDHEC-Risk Institute PhD in Finance EDHEC-Risk Institute Executive MSc in Risk and Investment Management Investment Management Seminars Contact Us Contact Us
EDHEC-Risk Efficient Equity Indices
Capitalisation weighting in equity index construction has come in for harsh criticism. There is ample evidence that market-cap-weighted indices provide an inefficient risk-return trade-off. From the theoretical standpoint, the poor risk-adjusted performance of such indices should not come as a surprise, as market-cap-weighting schemes are risk-return efficient only at the cost of heroic assumptions that are not fulfilled in practice.

Modern portfolio theory teaches us that, for a rational investor, the goal is to hold a portfolio that achieves the highest risk-adjusted performance. Therefore, one should focus on designing a portfolio with the highest reward-to-risk ratio, i.e., with the highest Sharpe ratio. Our research on efficient indexation returns to the roots of modern portfolio theory to provide an alternative to the current methods of constructing equity indices. The aim of this efficient indexation approach is to provide investors with benchmarks that reflect the possible risk-reward ratio from a broadly diversified stock market portfolio, and that are thus a proxy for the normal returns of an exposure to equity risk.
EFFICIENT INDICES
The EDHEC-Risk Efficient Indices aim at improving the risk/reward efficiency of market capitalisation or cap-weighted indices by applying an optimal weighting scheme to index constituents. Cap-weighted equity indices have a lower reward-to-risk ratio compared to what can be achieved through carefully constructed and well-diversified portfolios that invest in the same constituents.
FTSE EDHEC-RISK EFFICIENT INDEX SERIES
The FTSE EDHEC-Risk Efficient Index Series aims to capture equity market returns with an improved risk/reward efficiency compared to cap-weighted indices. The weighting of the portfolio of constituents achieves the highest possible return-to-risk efficiency by maximising the Sharpe ratio.
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